Meredith Whitney walks back municipal default rhetoric in new book on state finances

Famed banking analyst Meredith Whitney’s new book, Fate of the States (Portfolio Penguin, June 4), sets out to show that the fortunes of debt-burdened coastal states are waning, while interior states that emerged from the financial crisis relatively unscathed are poised to gain the most.

It’s an interesting forecast of demographic reckoning, but ultimately Whitney makes a thin case that proves more frustrating than convincing.

The book serves as something of a follow-up to a now-famous 2010 interview on 60 Minutes where her words were taken as a prediction of a near-term wave of municipal bond defaults. That made her a maligned figure in the municipal bond world as muni investors ditched the market en masse after her call. This book is her first full-fledged response to her critics.

In Fate of the States, she says that a shift in industry, wealth, and population all point to a diverging outlook for two groups of states. Those like California and Nevada are slowly falling apart under the weight of legacy costs, budget crunches, and housing-bubble-related challenges, she says. Meanwhile, states like Texas and Indiana are moving in to take their places as the new national elite. Whitney writes that many interior states have lower taxes, less debt, weaker protections for unions, and better infrastructure that are helping propel the shift.

She cites a number of examples of industrial shift, including this particularly telling one: “Boeing plans to close a plant it had operated since 1929 to move all future operations to Oklahoma and Texas.” (p. 172)

Oklahoma and Texas are lionized over and over again as examples of the new economic beneficiaries of wealth. But where is Boeing moving from? The citation reveals it is Kansas, a state she refers to just a few pages later as another job magnet. Whitney writes about that Midwestern state\’s job-attracting prowess: \”In neighboring Missouri, Kansas\’s aggressive tax cutting sparked fears of a westward jobs exodus.\” (p. 201)

How can Kansas be both a job gainer and a job loser? Jobs flow in and out of states every day for a variety of reasons. But within Whitney’s assertion of demographic divergence, the anecdote undercuts a thesis that is penciled in and scratched out so many times that we end up with little left at the end but a shredded map. It shows the pitfalls of trying to draw a distinction between two groups of states — if there is one, it is at best blurry.

Whitney runs into the same problem with Florida, which she mentions as a hopeless “housing bust” state at the beginning of the book (p. 47), but lauds for its superior business conditions near the end (p. 174).

Other facts prove misleading. As a defense of her 60 Minutes call, Whitney notes that municipal bond defaults jumped 400% to $25 billion in aggregate during 2011, the year after her interview (p. 195). What she doesn\’t say is that the figure includes defaults where a payment was made, but from a special reserve fund, in what is often referred to as a technical default. Though her numbers are correct, a separate calculation of defaults that only include when an issuer doesn\’t make a payment from any revenue source on time actually fell 61% in 2011 to $1.06 billion, a figure certainly worth citing as well. And she mentions the bankruptcy declaration of Mammoth Lakes, CA as an example of the municipal restructuring process (p. 190), but neglects to mention that the case was dismissed just a few months after the ski town filed its petition when the parties settled out of bankruptcy court.

Whitney also makes a few factual errors. She refers to Orange County, CA as declaring bankruptcy in 2004 (p. 186), when in fact it happened in 1994, (simply a typo, since she does get it right later on). She refers to the city of Atwater, CA as declaring a type of fiscal emergency that precedes a bankruptcy (p. 192), when in fact Atwater decided to eschew that type of declaration in favor of a different type of \”common law\” fiscal emergency that allows it to simply put tax increases on a ballot and take other budget-balancing actions.

Bloomberg

Meredith Whitney

But perhaps most aggravating of all is the constant hinting around the notion that a doomsday scenario awaits the supposed failing states without explicitly saying what it is. When Whitney was interviewed on 60 Minutes and appeared to indicate municipal defaults were on the horizon, at least her research seemed to culminate into a larger point.

In Fate of the States she backtracks on that conclusion, and doesn’t concretely formulate an alternative end game. She writes: “for the record, I never said those fifty to a hundred defaults would all happen in 2011, which was how my critics spun the story (p. 196).”

Whether or not Whitney\’s words were interpreted correctly, she had the chance to prove her critics wrong in this book. Instead, she ends up proving them right.

We imagine this won\’t be the end of the discussion over Whitney\’s book. The author is scheduled to appear on CNBC at 3 p.m. Tuesday.

Story Conversation

About The Tell

The Tell is MarketWatch’s fast and engaging look at trends and themes in the day’s markets. Drawing on our reporters, analysts and commentators around the world, as well as selecting the best of the rest online, The Tell is all about the pulse of the markets through news, insight and strategic information to help you make the best investing decisions. Got a tip? Tell us at TheTell@MarketWatch.com